In pursuit of a more perfect union, let me live with my best friends.
Howard Baetjer (rhymes with nature) is an economist who obtained his PhD from George Mason University, a lecturer at Towson University (my alma mater), and the most pivotal intellectual and academic influence of my life, having opened me up a world of thinkers and ideas that I consider foundational to my worldview today. I can trace an intellectual development that shifted tremendously when, in the spring of 2017, I first met Professor “Howie” Baetjer.
The Professor teaches at Towson where he inspires legions of students every semester, teaching them to write and think more clearly about economics. We discuss several important ideas and topics, such as the socialist calculation debate, Hayek’s 1945 article “The Use of Knowledge in Society”, and the role of prices in coordinating activity.
It was great to finally get one of our conversations on air—the Professor and I meet for virtual coffee once or twice a week—and it would be great to have him back soon.
Max: This is now, depending on how you count it, something like the fifth or so interview that I’ve done (third audio podcast, fifth total on the website). It’s basically been some of my favorite people, and I would be remiss not to include you.
Howard: I’m deeply honored to be one of them, Max. I really am.
Max: I think that among the people, especially in IRL as they say, in real life that have influenced me, I think you are the most responsible for the start of the big intellectual shift that I had right around 2017 when I first met you. And I think that so many things sprang from that. And so it’s important to maybe start there.
Now a lot of these ideas that we’ll talk about, you’ll be repeating yourself because you’re a professor and these are some of the ideas that you lecture on. I guess first though, could you describe who you are, what you do? That way people who’ve never heard of you will have some idea.
Howard: Okay. I’m Howard Baetjer. Howard Baetjer, Jr. I am a Lecturer in the Department of Economics at George Mason. No, I got my PhD at George Mason. I’m a Lecturer in the Department of Economics at Towson University. I teach courses on micro principles.
I’m lucky to get to teach the honors section most of the time of micro principles, and I generally teach a couple of other sections of regular principles of microeconomics. And I rotate through three courses at the upper level; comparative economic systems. I forget whether that was the first one Max took with me or not.
But comparative economic systems, money and banking, and history of economic thought. So that’s what I do professionally. I’m a teacher more than a scholar. I haven’t written and published as much as I sometimes feel I should have. But I love teaching so I put a lot of energy into that. And that’s really more fun than anything else for me.
But I have also written a book called Free Our Markets. What’s the subtitle? A Citizen’s Guide to… I have to look it up. The subtitle, A Citizen’s Guide to Essential Economics. And I have another little book that Cato Institute published not too long ago called Economics and Free Markets: An Introduction. And that goes with a lecture series that is… Again, I forget the exact name of it. But Max can look it up. (Here is that lecture series associated with the book for the Cato Institute)
Oh, I know what I was going to add. My main purpose in life, in the teaching and in the writing, is to help people understand the benefits of a market economy. And more generally, of a free society in which people are free to do as they please as long as they respect everyone else’s equal right to do as they please. So I’m a classical liberal, libertarian. And what I think of myself, what I do in life is I present these ideas. How’s that for a start, Max?
Max: That’s great. And you certainly do present those ideas. I had heard of someone like F. A. Hayek and I had heard of libertarianism. But I heard it in this denigrating way. There was almost this cloud of suspicion that hung over that name and that term. Where there’s smoke there’s fire. I didn’t even really bother to investigate the reasons why there is this back and forth. There’s more concern probably with all the other things that I wanted to occupy myself with.
I wish I was maybe one of those… I don’t know. Meet people who have been reading. Apparently, Tyler Cowen was reading F. A. Hayek at 13. Actually, I’m not precisely sure if that’s what it was. But just something that 13-year-old boys rarely read, and he was out there doing that. I was not with political economy or political philosophy. I was reading probably Lord of the Rings or something.
But I took your comparative economic systems class. And I then took every single one of your other classes, except for your principles course, since I had transferred to Towson with that course taken. But I took all of your upper levels. I thought I would just take one and then I wind up taking all three.
Howard: May I interrupt quickly?
Howard: Don’t I remember that we first met when you attended one of the political economy project lectures that I put together?
Max: That’s right. That’s right. It was for Antony Davies.
Howard: Antony Davies. My good friend, Ant.
Max: Yes. Yes, your good friend, Ant. He had an electrifying presentation on… I forget the title of it, but it was… Oh, was it… Oh, I think it was government expecting angels, getting humans. Or something, that was the title of the presentation. And it was this now to me very familiar set of criticisms about basically expecting unicorn good actors to be in government and to carry forth our sometimes vague ideas about what it is a good government ought to do. I remember looking up this website for the presentation slides. Because I just had never really heard such good ideas. And we can get into some of those.
Howard: Yeah, well, that’s Ant’s introductory lecture for that to help people get a good seat of the pants sense of public choice economics. This branch of economics that says, “Wait a second. The people in government aren’t angels. They’re people like you and me.” And so we need to think about how government is going to perform with that in mind.
Max: Or performs maybe for the average or even the worst use case. And certainly not the ideal or best use case. I think the best example of this would be people who would want to enforce speech codes. And could you imagine now Donald Trump at the helm of or picking the Speech Czar. Public choice enjoins us to think about what is maybe the likelier case of who it is that’s going to occupy these positions of power.
Howard: Yeah. That’s right. I don’t have the exact quotation or to whom to attribute it properly initially. But I know Milton Friedman used to say it frequently. And there must be a good version of it from the founding fathers. But the idea is something like this, we want to have government set up not to maximize the good, that the best can do if they get into power; but to minimize the harm that the worst can do if they get into power and still have government do its necessary jobs.
Max: That seems a very wise admonition. Even though it’s a bit of a conjecture. But I think history has borne out that, quite often, power changes hands. And over long enough timeline, you maybe want to protect against ruinous risk rather than playing for the most upside.
Max: And public choice is actually a field that I would love to know and dig into more. It’s one of those things I see constantly come up, and I’ve never taken a course in or haven’t read Tulloch… and I forget-
Max: And Buchanan! The Nobel Laureate—who was your instructor at George Mason?
Howard: He was there. And I got to interact with him a little bit at some seminars. But I never actually got to take a course with him. But by chance, two days ago, it arrived in the mail for me. I think it’s volume six of his collected works called Cost and Choice. So I just got a new book by Buchanan that I’m eager to get into. Because there were so many other things I wanted to study at George Mason, I took the public choice sequence, public choice one and two.
But I didn’t… Or did I? No, I think I just took the first course. And then I didn’t take the second course because it was so depressing to study all the ways in which people who got into power would abuse that power. I thought, “I can’t deal with it.” So I didn’t study as much public choice economics as I would like to have done. But I’m eager to get into Buchanan now more. A book just came and I have another of his books because I’m interested in debt and deficits.
Howard: So it’s called the Public Principles of Public Debt, or something like that. And that’s another one that should be in the mail to me in the next couple of days. But anyhow, to get back, I think we met first at Anthony Davies lecture. And I remember your enthusiasm and eagerness, and that you wrote your name down on this pad I passed around for people who would like to hear about other lectures in the series. And you came to other lectures in the series. I remember your bright smile and your look of eagerness. You seemed pretty juiced about this. So then I was very pleased when I saw your name on my class list not long afterward.
Max: Oh, wow. I think that whole lecture series that you were basically the principal faculty member for a political autonomy project. I loved all of the lectures that I attended. I attended almost all of the ones that were held while I was at Towson. And I think that maybe one of my crowning joys of Towson was, with your help, us requesting Bryan Caplan to come and speak on what to me was his exciting new book.
I remember hearing about his book back in…. I forget when. I want to say at least 2017, if not even sooner. Which would mean that I had heard a little bit of libertarianism before meeting him. But his new book, The Case Against Education. And I thought, “Oh my gosh. What kind of book is this going to be?” And they published it in, I think, January 2018.
I think maybe that semester we had him at Towson and you asked me to greet him at the university and present him and introduce him. And I got to spend a few hours talking with him and it was one of the most concentrated, nerdy, egghead few hours I’d ever had in my entire life. That guy, I’m a huge fan. And then it actually started a personal friendship with him. I’ve corresponded with him a little bit and also been to some of events that he’s hosted. So I’m a big fan of Bryan Caplan.
I also want to talk about your recent interest in debt, in public debt, and why that might be of interest because I started reading your (as yet unpublished) article again about the subject. But before we do that, I wanted to talk about one of the first ideas that I think really just blew my mind. And I think it started to do the work of an appreciation for free markets and free people. And I think that that was, in comparative economic systems, the socialist calculation debate. You’ve taught on this many times. This is all old territory for you. But I never heard of and never encountered so compelling a logical case against central planning.
And the debate started and was built upon… Started by von Mises and built upon by F. A. Hayek, by Friedrich August von Hayek, and was rebutted—certainly to their satisfaction—by a number of socialists. But I don’t know to our satisfaction. So if we could lay out the argument and we could talk about why I think that argument is so compelling… because that was, I think, the start for me of suspicion of the deference towards government and central planning. So how do you think we should broach that subject?
Howard: Well, you’re going to probably have to coach me a little bit. Because as you say, I’ve taught it so long I wouldn’t want to leave anything out. And there’s more to talk about than we can in just a short time. But I set my mind to it maybe I can summarize it concisely.
Max: Okay. Okay. How about you summarize it concisely? I was going to say if my memory serves, which would be a test of your teaching-
Howard: Oh, we have to do it that way. We have to do it that way.
Howard: I’ll set it up and you see how well you remember the argument. So a good way for your listeners to think about as background to this is that in 1917 the Bolsheviks stormed the Winter Palace and murdered the Czar. And the Bolshevik Revolution began in Russia. And they were explicitly Marxists trying to build a Marxist economy. And many people around the world were very excited about this. They thought this was the new, great step in the history of mankind. And they were going to overthrow capitalism, and install Marxism, and have central economic planning. That was in 1917.
And the Bolsheviks haltingly, with terrible difficulty, tried to get this thing going in Russia in the Soviet Union. And then in 1920, just three years later, an Austrian economist named Ludwig von Mises published an article called “Economic Calculation in the Socialist Commonwealth”. Which, as you say, I’ve taught a number of times. And in that he laid out an argument that said that even if we assume that people are well intended and we don’t assume any incentive problems, it’s simply not possible for a socialist economy to provide abundance for people.
Now, a better definition. By a socialist economy, what he meant was… or by socialism, what he was meant was common ownership of the means of production. So the factories, the roads, the machinery, the mines and so on are not owned by private corporations. They’re owned by the state. They’re owned by all of us in common. So people are allowed to have some private property, and their clothing, and their toothbrushes and so on. But the means of production, the things we use to make stuff with, those are all owned in common. That’s what he meant by socialism. And Mises made a logical argument that if that were the case it would simply be impossible to produce abundantly and efficiently.
Now, let’s test Max Efremov’s memory and see if he can lay it out.
Max: Yeah. That was a great historical context. And no, I’m not stalling. I have the answer in my head. I greatly appreciate the social reality of the Bolsheviks taking power and implementing with all sincerity this grand experiment, and expropriating, and abolishing money for a year or two back in, I think, 1920 or 1922. They really tried their darnedest to put these ideas into practice.
Okay. So the argument that Mises develops is that starting from the premise that, yeah, socialism is defined as the common ownership of the means of production. That therefore means that the means of production are owned in common. And so that means that there’s not going to be any way to trade or exchange ownership of the different factories, or machines, or commodities, or resources, or what have you. There’s no way to trade them because they’re all owned in common.
Howard: Yeah. So you might say also, another way to put it, no one is buying them, no one is selling them because different people don’t own them so that one person buys it from another. They all own together. So there’s no buying and selling of these means of production.
Max: Exactly. So everything’s owned in common. There is no buying and selling because there’s no one to buy or sell from.
Max: So because of this lack of exchange, that means that there are essentially no markets. So we go from not having any buyers and sellers to we don’t have markets, which means we don’t have prices. And without prices, there is no way to know how to employ resources in a least costly, less wasteful, more efficient way.
Howard: Good. Say a little bit more about prices. What’s so special about prices? Why do we need… Sounds like you’re really emphasizing prices, but why the hell do they matter?
Max: So prices, if they are the result of market forces, if they’re real, so to speak, and not assigned by someone arbitrarily, the argument-
Howard: Yeah. So let me add. If they arise out of the negotiation of buyers and sellers in the competitive bidding and asking so that maybe one buyer thinks, “Well, this ton of steel is worth $40 to me.” But somebody else is, “Well, I think I can make $50 worth of use of it.” So different people have different valuations for tractors, and steel, and aluminum, and electricity and so on based on their judgment about how good of use they can put it to.
And different people on the sell side are willing to sell. They want to sell for as much as they can, of course. But some people are willing to undercut others because they have lower costs and the others can’t match that price. And so you have buyers and sellers negotiating with one another, and looking for the best deal they can, and looking for sales and so on. And out of this turbulent process emerges the going market price. And the going market price indicates what, Max?
Max: It indicates relative scarcity.
Max: It indicates relative uses. I want to say that they’re meaningful indicators as to how profitably those means of production or resources could be used in their next best use.
Howard: Excellent. Let’s go one step more nerdy here. Give me a definition with the word “marginal” in it.
Max: Prices are the marginal cost of a resource?
Howard: Good, that’s one. They indicate the marginal cost. That is the cost of the marginal unit. That one more unit of steel. What is it going to cost the lowest cost factory to produce one more ton of steel? So the price indicates how much it costs to make that available. And what else does it indicate at the margin?
Max: What the cost of someone is willing to buy it, the marginal buyer. What it’s worth to the marginal buyer.
Howard: Yeah, good. You don’t want cost there. You want value. It’s the value to the marginal buyer. So that market price indicates… And there’s a little bit of slop in here when markets aren’t thick, as we say. There can be some distance between the value to the buyer and the cost to the seller. But to a first approximation, and especially in well organized markets, that price indicates at one time the value to the last or the next buyer and the cost to the last or the next seller. So in a real sense it gives you the value of whatever the hell this thing is today.
Max: Yes. Yes. It’s a meaningful indicator about value. And meaningful is important because when we’re deciding amongst the infinite ways in which we can employ resources, if we want to do it efficiently and not wastefully, we have to arrange those resources, and implement them, and utilize them in a combination that’s the least costly.
Max: That leaves things with higher values elsewhere to those uses. And there’s this one really illustrative example that… I don’t think von Mises provides. But I forget the author’s name you had-
Howard: David Ramsay Steele.
Howard: David Ramsay Steele. Methods A, B, and C.
Max: Right. So is there anything more you want to say about that chain of argument before I give the example?
Howard: No, I think we’re good. Keep going.
Max: Okay. So let’s say there’s many ways in which we can make a chair. In a contrived example, we could imagine that there’s three recipes; A, B, and C. And in those different recipes we’re using wood and rubber to make this chair. In recipe A, we’re going to use 10 pieces of rubber and 10 pieces of wood. And recipe B, we use five pieces of rubber and four pieces of wood. And recipe C, we’re doing a reverse. So whatever, if I said five and four of one or the other, then we’ll reverse it. So four wood and five rubber in recipe C.
So what these three recipes could tell us is, well, it seems that we can compare and throw away as wasteful: recipe A. Because it just unambiguously uses more things to create the same product. And so, in absolute terms it’s the most wasteful of the three recipes to make an object. But how do we evaluate what is the more efficient way to make a chair between recipes B and C? The one that uses slightly more wood? Or the one that uses slightly more rubber? Without an indication as to how valuable those different resources are, there-
Howard: In other uses. In other uses. How valuable they are in other uses.
Max: There is no way to evaluate which resource is the more valuable, which has greater value in other uses, and which are more appropriate for chair making. We happen to have a really wonderful way of communicating that relative scarcity or relative higher value uses in other cases, prices.
Howard: Yeah. You don’t need to say higher value there. You can say we have a wonderful way of indicating the value of all these different inputs we could use in the many, many possible ways of producing things. We have a way to value each input that might be used. So thereby we can… Go ahead.
Max: Yeah. Thereby with prices that reflect underlying conditions, underlying scarcity, and are meaningful in that sense and real, the result in market forces, with these prices we can actually say, “Oh. Well, maybe recipe C is the less costly of the two recipes because we can just simply tabulate the cost of the inputs. And whichever is lower is the one that’s less wasteful in terms of saving resources that have a higher value for other uses.”
Howard: Bravo, Max. You’ve remembered well. I’m gratified.
Max: So what’s incredible is it’s a logical argument against the ability of socialist economies to raise standards of living, to calculate economically efficient ways to employ scarce resources.
Howard: Yeah. I need to jump in.
Howard: Without prices the socialist planners, even with the best of intentions, simply can’t know the more and less wasteful ways to produce things. They just can’t find that out. And there’s basically no way in which they’re going to guess it right each time. What that means is production in socialism is going to be much less efficient. It’s going to be very wasteful. And that means people just aren’t going to live as well in socialism as they would in a system of private ownership.
Max: Absolutely. That chain of argumentation, I remember one of the epiphenomena, was this raised eyebrows and marked shift in thinking. And wow, this is one of the first arguments against socialism that didn’t rely on what feels like rhetorical devices.
Howard: You remind me of what I think David Ramsay Steele says in that same introduction I assigned to you guys. He says, “What this means is for socialists, even when there’s a will there’s no way.”
Max: Yeah. And then while we’re here I would love if we talked about The Use of Knowledge in Society. Which is a part of this debate, no?
Howard: Yes. Yes. Arguably, it was the coup de grace of the socialist calculation debate, even though it was published in 1945 when the debate had petered out in active economics at the time. It has been revived, and recognized, and celebrated since then. But while the socialist calculation debate was going on… Well, I should say that differently. The socialist calculation debate went on with real vigor beginning in 1920 with Mises’ article, and then with responses from socialists, and then another counter response from F. A. Hayek.
And then the article that actually won the debate in the opinion of many, which was from the socialist Oskar Lange in 1937. And then Hayek responded in 1940. But by then the war was looking like it was coming along and people were interested in macro economics and the Depression. People stopped paying as much attention to the socialist calculation debate until Hayek in 1945 published his great, great article, The Use of Knowledge in Society. I don’t know how many people read it, and I’m not sure there was a lot of response from the socialists because maybe they didn’t really notice it then. They were looking at other things.
Max: Yeah. But it’s really an incredible article. And I’ll absolutely include it and ask people to read it. I forget whose anecdote this was. But someone, a famous later Nobel Laureate, remembers reading the Journal of Political Economy. I actually forget which journal that article appeared in.
Howard: American Economic Review.
Max: Okay. Good for you. I remember an anecdote of an American economist, forget who, reading the article and just having to sit down, he was so floored; he ran through the economics department of whatever university they were at. Just like, “Have you guys read this thing yet?” And please employ me as you see in explicating the article. But I would love if could also take an active role and make a case for what is he saying and why is it important.
Howard: Okay. This is good practice because I’ve allowed one class for this in the upcoming History of Economic Thought course. And I’ll probably lecture a bit on this. Okay. Let’s see. Usually I go from a little outline with the different portions, but I don’t think I need that. He begins by talking about planning and saying that there are… In the terms of the discussion of his time, what people meant by planning was central planning, government planning.
Remember, this was at the time when the Labour Party was dominant in Britain and someone said, “We have won the war. Now let’s win the peace.” And they celebrated how the economic planning had generated production of war materials to help Britain and the United States win the war. So they said, “If we can plan for war, why not plan for peacetime?” So they meant government economic planning.
Now, Hayek points out that there are really two kinds of planning. There’s the kind of planning that people normally mean of government planning. But there’s also individual planning. He says there are two options. Economic plans can be done centrally by some sort of central body or bureaucracy that plans for the whole economy, and this what the socialists of the time had in mind. Or planning can be done individually by different individuals.
He says, “Which of these is likely to be more successful depends on whether or not we’re more likely to get the information needed for good planning to the center or get the information needed for good planning to all the different individuals who might do their decentralized planning.” Those terms, I should come up. The choices between centralized planning and decentralized planning.
So he lays that out at first. That’s the choice we have to make. And which kind of planning will be better? Probably depends on which method, gets the information the planners need to the planners better. Then in this great section, I think it’s section three, he talks about the different kinds of knowledge. And he distinguishes between scientific knowledge and do you remember the term, Max?
Max: I think so. The other kind of knowledge, not the general scientific knowledge, but the “knowledge of the particular circumstance of time and place.”
Howard: Way to go and you got it quoted. Good boy. That’s right. Knowledge of the particular circumstances of time and place. So now, the first kind of knowledge, scientific knowledge, can be written down in books. It can be put into statistical tables. It can be sent to the center pretty well and they can manage that.
But he says, “This knowledge of the particular circumstances of time and place is another very important kind of knowledge that we use all the time and that by its nature cannot really be communicated to the center.” For example, each different person knows his or her own inclinations and the kinds of things that he thinks he or she is good at.
Some people know about supplies of particular goods that might be available in our time of COVID; where there’s personal protection equipment or whose got masks and so on. Real estate agents, realtors knowledge, is of this kind. The knowledge, “Oh, this house just went on the market and that other one went off.” So this is knowledge of the fleeting circumstances of time and place. And Hayek makes the point that this is very, very important information.
The next section is on the importance of change. He says that if there really weren’t much change in an economy then it might make sense to plan things centrally, plan how we’re going to do them because the way we do things this year is going to be the way we do things next year because there’s not much change and we should be able to tune the system to get it really efficient. But if we’re in a situation as we are, where there’s constant change of all kinds; famines, and changes in weather, and changes in tastes, and dramatic improvements in technology; all kinds of changes of that kind.
In that situation, it’s usually going to be people at a particular time and place who know about the change and perhaps know how we might react to it. So the knowledge of changing conditions that the economy must adjust to is spread out among all sorts of different people. And he says, “We must be able to use that knowledge of the special particular circumstances of time and place. That it is in the heads of all these different people.
You and me, and the farmer out in Nevada who realizes this hay is too moist still to bale. “We can’t bale this today. We got to bale it tomorrow.” Or the factory owner who realizes that his best engineer is out sick. So they’re going to have to wait to start in on this project. All sorts of particular information. In order for the economy to make good use of it, the decisions based on that information have to be made by the particular people who have that information. And they can’t convey that information to a central planning authority, not in a timely way.
So he says, “If we’re going to take advantage of the special knowledge that people have, we have to let them make the decisions that are based on that knowledge. Which means we’ve got to have decentralized decision making in order to take advantage of that decentralized knowledge.” And then there’s the transition between section four and section five. And he says, “In order for decentralized planning to work the man on the spot, so to speak, the person with the particular circumstances of time and place must have not only his own information. But he or she must have information about what many other people are doing in related fields with the sorts of resources they might want to use. So they need to know what other people know. How are they going to get that information?”
Let’s take an example. Suppose you’ve got a manufacturer who wants to ship his product in sacks of some kind. Should he use paper sacks or canvas sacks? Or to go back to your example, if he’s making chairs should he use more wood and less rubber? Or more rubber and less wood? He has his own information, but he needs to know how valuable the wood and rubber are to other people to keep his actions well tuned and coordinated with their actions so that the system is as a whole works well. How can he find that out? How can a farmer, for example, find out whether to use more, “I wish I knew about fertilizer with phosphorous or fertilizer with something else in it.”
How will he know which of these kinds of fertilizer to use so that the whole economic system works efficiently? How can he get the information that other people have, say that other farmers really need only this particular kind of fertilizer? It’s not a choice for them. They really need this one. Well, how can one farmer know about other farmers needs? And the answer is prices. The prices of all these other goods that a person is concerned with reflects what everybody else knows about how they could use it, how effectively they could use it, what substitutes there are for it.
So to bring this back full circle, while at first it might seem screwy to think that it’s more efficient to get information from everybody to everybody so that everybody can plan than it would be to get information from everybody to the center so the center can plan. In fact, we have this extraordinary means of getting information from everybody to everybody.
And indeed, you don’t need to get all the information of all sorts of things to the farmer. You only need to get information about the price of fertilizers to the farmer. He can ignore the price of steel, and the price of aluminum, and the prices of jet engines and so on. He just looks at the price of the things that he’s concerned about. And so these prices convey to the people who need it information about what everybody else is doing with respect to the goods and services that he or she might use. And that enables decentralized planning that takes advantage of this radically dispersed knowledge.
Max: Bravo. That took me back to those Towson chairs. Thank you for that.
Howard: Yeah. To your listeners, Max, it is just a wonderful article. It’s hard at first. And the great economist Thomas Sowell, it illustrates the difficulty you might have. When he first read it he wondered why it was even assigned. But some years later he read it again and he thought, “There’s really something here.” And then some years later he read it again and thought, “Hey. This is really important.” And he kept reading it and eventually he wrote a whole book on it titled Knowledge and Decisions, which is based on that article. So it’s a little bit of a tough read. There aren’t examples, except for the tin example. It’s all quite abstract. But it is masterful and important.
Max: Yeah, it is. And just for the tin example, you made the point about getting all this information to the man on the spot. But that information is vast. And in fact, it’s not that he needs all of the information. He needs really the relevant information. Because you can strip away a whole lot just by having him observe the price of whatever the goods and services are. And if those prices go up or down in fact, he doesn’t even need to know why.
Max: So with the tin example, it might be the case that there’s now a huge demand for tin for some new product or new process or what have you. Or tin mines collapsed somewhere and now there’s a scarcity of tin relative to the period prior. No matter the reason, the price goes up. And a user of tin doesn’t need to know all of the different decisions that went into the shift in demand or all of the different reasons why the supply became restricted. All that information can be stripped away, and it’s reflected in the higher price. I think it’s your quote in your book, “Prices are precious.”
Howard: Yeah, I say that. Yeah.
I’m looking for… Here’s The Use of Knowledge in Society. I’ll read you from Hayek what he says here. Got the wrong damn glasses. All right. Page 85. “There’s no need for the great majority of them to know where the more urgent need is or isn’t,” and so on. “If only some of them know,” and so on. Oh shucks, Max. Oh yeah, here it is. “It does not matter for our purpose, and it significant that it does not matter, which of these two causes made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere. And that, in consequence, they must economize tin.”
And so the price system, there’s a wonderful term that Alex Tabarrok and Tyler Cowen use in their textbook in Marginal Revolution University. And that is a price is a signal wrapped up in an incentive. A price is a signal wrapped up in an incentive. A price is a signal that something has happened to make tin more scarce. The increase in price in both, the increase in price, signals that tin has become more scarce and it provides an incentive to use a substitute if you can.
I’m feeling the enthusiasm for this. When I learned this, the excitement about it. It’s just an absolute marvel. Marvel is a term that Hayek uses in that article. It’s a marvelous, extraordinary thing. Without anyone planning it, without anyone intending it, this price system has grown up for humanity and enables a glorious, smooth coordination, and interaction, and mutual assistance. And without it, we’d be done for.
I saw in the paper today, President Trump has signed executive orders about the price of drugs and restricting the prices of drugs. And I worry about that. I hope that’s not the camel’s nose under the tent that’s going to lead to pharmaceutical price controls. God knows we’ve got a terrible, terrible system of pricing of pharmaceuticals. But to let politicians put controls on them is not the way to address that problem. Excuse me.
Max: Yeah. Well, about that, what would be the solution? Right now the situation seems to be that certain prices are too high and we’d like to be lower. We’d like them to be lower not only because that would be, gosh, convenient. But there’s also a moral case that sick people need those drugs and there may also, certainly some portion of the poor… I’m sorry, some portion of the sick are poor. And so, can’t afford it. It has a moral dimension. And so these high prices are unfair. What would the solution be to that?
Howard: I’m gradually learning in this area. I’m no expert. So I can’t speak with great authority, and I can only speak in general terms because the way drugs are prices in the American economy is crazy. And it has to do with Medicare being I think the 65% of the demand in the whole country, and that’s a government demander. And it has to do with insurance.
Max, I hesitate even to answer briefly on this because I can only answer in broad strokes and in terms that are going lead many of your listeners, perhaps, to think, “Boy, this guy Baetjer is just a free market wacko. It can’t be that simple.” But the answer that I would give is that we really need a free market in healthcare. We need consumers to be paying more of the price of things at the margin. That’s a lot of jargon. Insurance should be real insurance, rather than pre-payment.
We should get the government out of it. And we’re not going to, of course. Medicare and Medicaid are here to stay. But they are a big part of the problem. We need people to have freedom. We need drug buyers and drug sellers to have the freedom to buy and sell from one another without getting the FDA’s permission. I’m just mumbling. I’m babbling now, Max. The basic answer is that healthcare is one area of the American economy where the government is most active and most intervening.
And it’s those interventions that are causing the problems. We need to clear out those interventions so that we have more free market competition and we would find the prices of good medicines being bid down. Now of course, new, expensive ones are going to be expensive. But there would be alternatives for people that would be less expensive, I believe. And I should stop there because I’m just not expert enough to use your listeners time usefully.
Max: Well, you’re right that healthcare is not only a very complex Byzantine domain, sector of the economy. But also, it has this-
Howard: Careful, Max. May I interrupt?
Howard: The financing of healthcare is Byzantine, and complex, and opaque. Healthcare services; surgery, medicines, or so on; those are economic goods and services like others and they should be treated that way. Now, one important asterisk right away, if people have difficulty paying for it, why then we ought to subsidize them somehow. Whether through private charities and so on or government providing a voucher like food stamps to people which they can buy medical services. But it should be much more free market.
Max: You’re right. I think that that’s a more precise way of putting it. But I was going to say that is there not… What do you make of the moral dimension to healthcare? It seems to take on more of a special nature than maybe food, or iPhones, or other goods and services. Is that the right way of thinking about it? Or is that [crosstalk 00:54:53]?
Howard: I don’t think so. I don’t think so. Food is more important than medicine. And if we had government provision of food we’d be in the same kind of screwball situation we are with medicine. I see no reason why medicine, medical services can’t be… There’s no public goods aspect to them. There’s no market failure aspect to them. These are private individual goods.
I think there’s no more moral dimension to it for me than there is with food. Just as I think you and I have a moral obligation to help someone who is starving and can’t pay for it, you and I have a moral obligation to help someone who is sick and then can’t afford his medicine and treatment. I see no meaningful difference whatever. And fortunately for us, food provision is very largely unregulated. The government doesn’t participate in it as it does with Medicare and Medicaid. And so it works fine, and medicine would work fine also.
Max: Yeah. I was playing devil’s advocate there. I’ll stop because I agree. I think that the moralizing about it is a red herring or distraction. Right? I think that it confuses and… That might condescending to say that someone is confused about the issue. But I think that healthcare is not subject to price discovery and competitive forces, and if we let it, prices could come down. There’s a lot of hay made out of “get the profitability out of healthcare”.
“Get the profit-motive out of healthcare.” It certainly sounds good. It’s one of those things that I think some of my criticism of leftists… is that if they’re not out-and-out literary devices, they’re things that sound good. It sounds good “get the profit mode out of healthcare”.
Howard: Yes, there’s a rhetorical force.
Max: Exactly. Jonas Salk is a moral hero. He willingly gave up the patent to the polio vaccine and didn’t profit from it. And I think that that’s a completely commendable, wonderful thing. But when it comes to the large scale, complex provision and discovery of drugs and medicine, we can’t rely just upon people’s vague sense of… Or rather, the obligation about their fellow man whose sick and can’t pay for it. We must marshal creative forces and innovation when we let signals of… For instance, high prices of drugs. High prices are a signal to someone to bring that price down, innovate, and capture some of that lower-cost provision of medical care in the form of a profit.
So we’re coming up on an hour.
Max: And that’s normally how long we do it. So I could go on and on. But what do you think? Do you think we should call it there?
Howard: Yes. Ok. Thank you so much Max!
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